When it comes to qualifying for a mortgage, the current debts you have can determine what purchase price you can buy at. I often hear from people who have worked very hard to maintain a good credit score and have finally saved up the down payment and are now ready to buy. However, after my review, I have to then inform them they don’t qualify at the price they want to buy at due to the car payment they have. It’s not really something any potential home-buyer wants to hear, so this week I want to go over the basics of mortgage qualifying which you should think about before taking on any new debt before you consider buying a home.
When calculating a mortgage that is affordable for you, we use two formulas and apply them to your specific financial profile. These are the key terms you need to keep in mind when you start preparing for the mortgage approval process.
GDS Ratio– Gross Debt Service Ratio
These are the costs attributed to housing such as mortgage payments, property taxes, heat, and condo fees if applicable. These payments cannot take up more than 32 -39% of your gross annual income depending on your credit score, the product you are applying under and the lender you are working with. There are exceptions though they may only be available to you through an alternative lender which means you will likely have to pay a higher interest rate with more down payment required.
What income you have coming into your household which can be included in your gross annual income can vary between the different lenders which may require a preliminary discussion with an experienced mortgage professional.
TDS Ratio– Total Debt Service Ratio
The potential housing costs as mentioned above PLUS any existing debt payments you already have cannot total more than 40-44% of your gross annual income, again, depending on your credit score, the product you are applying under and the lender you choose to work with. This is where a high car payment or any other monthly debt obligations you have can reduce the mortgage amount you qualify for. The more “room” those personal debt payments take up reduces the amount left to cover housing costs. When you have less to cover housing costs, your buying power is reduced to properties that fit within your mortgage and down payment budget.
Simply, the higher your income amount, the less impact a vehicle payment will have on your mortgage affordability calculations. Best way to maximize your mortgage affordability is to reduce debt. There a few other tips I want to pass on to help you qualify for a mortgage solution that fits your needs.
Timing is key and if you’re trying to qualify for a mortgage now or in the near future, think twice before you take on any type of new debt. This includes credit card debt, vehicle loans, lines of credit or “don’t pay for a year” borrowings. If it is a necessary expenditure, try to delay it until after the mortgage financing has been completed or make sure to set the required minimum payments as low as possible. You can always pay more to reduce the debt if you want to pay it down quicker as consumer loans usually don’t have any prepayment restrictions like mortgages do.
If you have existing debts that you’ve been working to pay off and you want to apply for a mortgage now, team up with an experienced mortgage professional who might be able to help you restructure your debt in a way that will help you maximize your mortgage affordability.
It’s kind of a double-edged sword because while you need debt to build credit and maintain a good credit rating, too much debt can affect you negatively. So be sure to keep a close eye on your debt levels to ensure they’re helping you improve your financing profile rather than to hinder it. If you want to calculate the maximum mortgage amount you can qualify for and see how a debt can affect it, contact a trusted mortgage professional or plug the numbers into an online calculator though be sure it’s applicable to mortgages in Canada.